Valuing a Wealth Management Business Reviewed by Momizat on . The Art and Science Most businesses have special characteristics that affect its value. Some are endemic to the industry and some relate to the personal nature The Art and Science Most businesses have special characteristics that affect its value. Some are endemic to the industry and some relate to the personal nature Rating: 0
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Valuing a Wealth Management Business

The Art and Science

Most businesses have special characteristics that affect its value. Some are endemic to the industry and some relate to the personal nature of those managing the business. Wealth management businesses have both characteristics. Here are some considerations that go into determining the valuation.

Valuing a Wealth Management Business—The Art and Science

Most businesses have special characteristics that affect its value. Some are endemic to the industry and some relate to the personal nature of those managing the business. Wealth management businesses have both characteristics. Here are some considerations that go into determining the valuation.

Defining a Wealth Management Business

Wealth management businesses manage investible assets usually with marketable securities such as stocks, bonds, and cash equivalents, but can also be with commodities, real estate, currencies, private equity, and venture capital and other alternative and private investments. Wealth management is different from pure investment management in that it involves both relationship management and wealth planning.

Wealth Management Revenue Stream

There are various methods of firm compensation. Fees can be on a time basis, fixed fees negotiated in advance, fee based with or without performance component, and/or based on assets under management (AUM). When the compensation is solely from payments from the clients, it is usually referred to as fee-based compensation. Compensation can also be received from commissions or fees received from external investment firms.

When determining firm enterprise value, the quality and predictability of these various income streams play utmost importance when determining proper firm value. It is important to recognize the wealth management process can be involved, complicated, and requires a skilled and talented team. Employee retention and firm morale, though subjective in nature, should not be overlooked when forecasting a recurring revenue stream.

Methods Private Market Value (PMV) can be determined

Like any business, there are many ways to determine value. Part of the determination will be based on the standard of value and the purpose. For instance, a valuation for estate or gift tax reporting would be performed differently than if the valuation was for a divorce or to buy out a present owner. Likewise, a valuation for a buy-sell agreement would also be determined differently than if the business was offered for sale. The identity and purposes of the buyer could factor into the valuation as would the reasons why the business is being sold. Acquiring a majority vs. minority ownership can also lead to different valuations as a premium can be awarded for control or discount for lack of control.

Depending on the ultimate buyer, there are logical approaches to determine PMV. A strategic buyer with economies of scale (looking to fold the business into the current structure) may be willing to pay higher value vs. an investor looking for a cash on cash return.

General Guidelines

Some general guidelines to begin forming your valuation for a going concern wealth management business:

  • Revenue multiple: This can generally vary between one to three times trailing 12-month revenue
  • Cash flow multiple: This can vary from three to eight times EBITDA
  • Asset multiple: 1 percent to 2 percent times AUM
  • Market approach: What similar public companies are selling for, if similar companies can be identified

Firms will less than $500 million of AUM should expect to receive on the lower end of the ranges. Multi-billion AUM firms, on the contrast, could expect (all else being equal) the value on the higher end. There is less room (from the cash flow perspective) in smaller acquisitions to absorb any valuation errors should the technology, key person retention or other operations be less efficient than previously imagined. It is even possible that the EBITDA of the smaller firm can be overstated due to a lack of investment in technology and human capital—thus creating a “value” trap.

Care must be taken in the approach that is being used to evaluate how profitable the business is.

Multiple analysis can prove to be very misleading depending on how profitable the business is. As an example, using asset multiple approach would value two businesses with a $1 billion of assets the same even though one could have 40 percent EBITDA margins and the other 20 percent margins. Similarly, an effective billing rate of say 80 basis points would produce significantly greater revenues than a firm that realizes 40 basis points if both had the same AUM.

There are subtleties to the cash flow multiple analysis. Are the cash flow patterns erratic, declining, or of suspect quality? Are the origins of the total cash flow diversified or tied to say one product? In a more stable wealth management business, the cash flows may prove more predictable than say a hedge fund where asset growth and retention are much more aligned with performance.

The market approach can be useful, but what can be unpublished and therefore unknown may be of critical importance. Also, finding a comparable company could be challenging.

The finessing of the additional quantitative and qualitative factors will allow us to narrow the range that a reasonable buyer will be willing to pay.

Factors to Consider when Valuing a Wealth Management Business

Factors to consider when valuing a wealth management business include:

  • Terms of payment: A business that sold for all cash would be valued differently than if there was a minimal down payment with a drawn-out deferred payout. With a deferred payment, interest rates are also a consideration. The tax structure of the deal (capital gains vs. ordinary income) will also be a factor in the valuation, as will an earnout.

If the business is being sold, the reasons for the sale and time constraints can also be a factor in the valuation.

  • Compensation model: Is it fee based, or does it include commissions or referral fees, or are there performance bonuses? The primary factor in the business’ valuation is the predictability and sustainability of the revenues. A more steady, recurring nature of revenues would increase the value of the business.
  • Type of clients: How seasoned is the book of business? Is there a younger, growth-oriented client base rather than a majority of clients in defensive retirement mode? Is the “book” growing by net contributions or being depleted by withdrawals/death? Client turnover is a vital factor to consider before determining the ultimate value: steadier business equals more profitable business as well as sustainable cash flow.

It is important to understand how much of the larger client relationships make up the book as there is risk to concentration. If, for example, three families represented 60 percent of the total client AUM, it would be a red flag in valuation. Also, to be considered is the involvement of the client and the frequency of the attention and interactions needed to be provided to them and costs to maintain any newly required relationships. No two clients are the same and better the understanding of their needs and time commitment, the more accurate the ultimate value will be.

  • Direction of AUM: Trend of the AUM growth is a critical factor. Declining AUM, unrelated to cyclical market forces will be a drag on the valuation and perhaps changes the framework for valuation.
  • The alignment of investment philosophy matters: Succession and client retention risk will be higher if the acquiring firm’s investment philosophy is not aligned with the purchased firm. For example, discretion and non-discretion are two very different business models. Different values might ensue depending on whether the portfolios are invested in individual stocks and bonds, mutual funds or index or exchange traded funds, or in other investments such as separately managed portfolios. Is one style attributed to the accounts or are multiple investment approaches used? Each method and uniformity or lack thereof requires different activity, attention, risk, and oversight, and these all could affect the value.
  • Business development: The method (and cost) of acquiring new clients needs to be understood. Also, the extent of referrals from existing clients or their advisors; and whether there is account growth by clients adding assets to their accounts. If there is a digital presence, it will need to be determined the extent it provides value. This includes a web site, social media presence, and customer activated review sites.
  • Personnel: The number of personnel, length of time with the company, background, credentials and licenses, compensation, and functions they perform are all important and can affect the valuation. If independent contractors or outside vendors are utilized, the extent of their services need to be reviewed.
  • Succession plan: A business with a solid succession/transition plan for the book of business would command a higher value than if there is not any. Is the primary relationship person available to organically transition the book to the new owners? If not, it could be a concern. A greater number of client-facing employees (who are staying onboard) would make the business more attractive and more valuable.
  • Value added services: Does the firm’s business model include value-added services such as financial planning, tax preparation or concierge services? Does potential acquisition target bring additional services to the new firm? If so, what is the extent and cost of such services and frequency of use? For example, if tax preparation services are offered, this could create a time crunch during March and first half of April or September and first half of October when tax returns are usually prepared. Also, if these are performed by inhouse personnel or outside providers such as an accounting firm need to be reviewed.
  • Account custody: To be considered are whether the accounts are maintained by a related or affiliated broker-dealer or an independent, qualified custodian.
  • Compliance issues: Extensive, or even a small number of violations or fines will affect the valuation. Also, to be reviewed are the extent there have been client complaints. Disclosures of firm’s violations, if any, should be part of the disclosure requirements of the purchaser. Further, all licenses need to be current.
  • Location: The extent of the importance of the office location as well as client location needs to be determined. Alternatively, how often are clients met with and where?


Besides the normal procedures in valuing a business which are not covered here, the specific business model of a wealth management business needs to be considered. Each item listed above, and likely many more that are not, needs to be factored into the contribution to the business’ valuation, either as positive or negative. The valuation process requires the appraiser exercising an art, not a science, and the full breadth of their experience needs to be applied to result in a reasonable conclusion of value for the client and purpose of the valuation.

There is an adage: “Measure twice, cut once”. It could not be truer when valuing a business, especially one that is nuanced as the wealth management industry.

Edward Mendlowitz, CPA, PFS, ABV, CFF, is partner with WithumSmith+Brown, PC in East Brunswick, New Jersey. He has over 40 years of public accounting experience, is a licensed Certified Public Accountant in the states of New Jersey and New York and is one of Accounting Today’s 100 Most Influential People. The author of 27 books, Mr. Mendlowitz has written hundreds of articles for business and professional journals and newsletters and presented over 350 CPE programs. He writes a twice a week blog at

Mr. Mendlowitz can be contacted at (732) 743-4582 or by e-mail to

Elena Ladygina, CFP, is Vice President and Wealth Advisor with Withum Wealth Management. She received her bachelor’s degree in business from Wake Forest University. She has spent more than 15 years in financial services industry and holds the CFP designation. Ms. Ladygina has also passed CFA Level II. She utilizes her expertise in implementing investment and financial planning strategies for high net worth individuals. She co-heads the Withum Wealth Investment Committee and firm’s due diligence.

Ms. Ladygina can be contacted at (917) 821-3606 or by e-mail to

The National Association of Certified Valuators and Analysts (NACVA) supports the users of business and intangible asset valuation services and financial forensic services, including damages determinations of all kinds and fraud detection and prevention, by training and certifying financial professionals in these disciplines.

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